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2018 (11) TMI 503 - AT - Income TaxBogus purchases - computation of income - estimating 12.5% as profit on bogus purchases - assessee engaged in the business of trading in timber and plywood - AO received information from DGIT (Investigation), who in turn received information from Sales Tax Department, Mumbai that the assessee has made purchases from hawala parties - Held that - CIT(A) has applied the profit rate at the rate of 12.5%, which according to me is on higher side going by the nature of business of the assessee i.e. timber and Plywood in which the profit rate is low. Thus in full agreement with the argument of the learned Counsel for the assessee and according to me a profit rate of 8% will meet the end of justice in view of the decision of CIT vs. Smith P. Seth 2013 (10) TMI 1028 - GUJARAT HIGH COURT as the assessee has also paid the VAT element on these bogus purchases. On this account, a further deduction in estimation of profit to the extent of 4.5% can be allowed. Hence, direct the AO to recompute the income after applying profit rate at the rate of 8% and computer the income accordingly. Assessee s appeal partly allowed.
Issues:
1. Estimation of profit on bogus purchases by CIT(A) Analysis: The case involved an appeal by the assessee against the order of the Commissioner of Income Tax (Appeals) regarding the estimation of profit on bogus purchases. The Assessing Officer (AO) had made an addition of profit on unproved purchases after receiving information that the assessee had made purchases from hawala parties providing bogus bills. The CIT(A) estimated the disallowance at 12.5% of the bogus purchases, citing judicial precedents and the Gujarat High Court decision in a similar case. The CIT(A) upheld the AO's decision but reduced the estimated profit rate to 12.5%. The assessee argued that the profit rate should be lower due to the nature of their business in timber and plywood, suggesting a profit rate of 8% instead. The Tribunal agreed with the assessee, directing the AO to recompute the income with a profit rate of 8%, considering the VAT element paid on the purchases. The appeal was partly allowed, granting relief to the assessee. The key contention was the estimation of profit on bogus purchases by the CIT(A), which the assessee challenged as being too high. The Tribunal analyzed the nature of the business and the Gujarat High Court decision, ultimately deciding on a lower profit rate of 8% instead of the CIT(A)'s 12.5% estimation. The Tribunal considered the VAT element paid by the assessee on the purchases and granted a further deduction in the profit estimation to the extent of 4.5%, resulting in a revised profit rate of 8%. This adjustment aimed to align the estimation with the business realities of trading in timber and plywood, providing relief to the assessee in the form of reduced profit addition. In conclusion, the Tribunal's decision in the appeal addressed the issue of profit estimation on bogus purchases, modifying the CIT(A)'s decision to lower the profit rate to 8% from the initial 12.5%. By considering the nature of the assessee's business and the VAT element paid, the Tribunal aimed to ensure a fair and just estimation of profit, resulting in a partial allowance of the appeal in favor of the assessee.
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